On April 11, Shopify (SHOP 0.09%) announced it was splitting its stock 10-for-1 effective June 28. While stock splits are primarily cosmetic in the days of fractional share brokerages, it helps with options strategies and benefits those without access to fractional shares.
In the past, stock splits have sent stocks soaring -- take Tesla rising more than 80% in the days after it announced a stock split in 2020. Yet, for Shopify, in the week after its stock split announcement the stock was down around 6%. So what's different about Shopify's situation?
Why not split at the high?
Many companies such as Tesla have recently split their stock at or near its all-time high. Shopify is down more than 65% from its all-time high. Many investors are asking the same question: Why split now when Shopify could have split at more than $1,700 per share last November? The answer? To preserve and protect the voting power of CEO and founder Tobi Lütke.
As a shareholder, you can vote at company meetings on items like the board of directors, compensation studies, or stock splits. Unlike voting in a democracy, each person does not get one vote. Instead, each share held counts for one vote, with some classes of shares holding more than one vote. Therefore, the largest shareholders influence what is voted upon and the outcome. Company founders often own the most significant stake in the company, mainly because they have been employed for the longest time. Over time, their shares may get diluted, or the overall count may decrease due to selling shares to finance their personal life.
For Lütke, his voting power has slowly decreased.
|Percentage of Votes Controlled by Tobi Lütke|
With Lütke having less power, outsiders could take positions on the board and influence actions that he doesn't want. As a result, the Shopify board has approved a new class of shares dubbed the "founder share," which would have a variable amount of voting power per share to preserve his control. However, his voting power would be permanently set at 40%, limiting his overall grasp on the company. When the time comes for Lütke to step away from Shopify, this class of shares will be retired. While the board has approved this action, shareholders must confirm it at Shopify's annual meeting on June 7.
Although Lütke is excluded from the vote, with unanimous board approval and Klister Credit Corporation (the second-largest shareholder) agreeing, this motion is practically guaranteed to go through, as Klister holds more than 15% of Shopify's voting power.
Is a more powerful Lütke a bad thing?
Having someone permanently control 40% of Shopify's voting power could be considered a single-point failure risk. What Lütke says goes, barring any illegal activities. But this may not be a bad thing, as Lütke has successfully led the company since its founding in 2006 to become an e-commerce giant. As of October 2021, Shopify's merchants made up 10.3% of U.S. retail e-commerce, trailing only Amazon at 41%.
Shopify has become the go-to platform for anyone looking to establish an e-commerce presence. Starting at just $29 per month, its tools allow entrepreneurs to process credit card payments and display products on a professional-looking website. Customers can unlock more capabilities like cheaper shipping rates or business reports through higher pricing tiers as their company expands. Shopify also offers capabilities needed to compete with more prominent e-commerce platforms, like two-day shipping through the Shopify Fulfillment Network.
This was all developed by Lütke and his team at Shopify; changing who has voting power may not be in the best interest of the business or shareholders.
Is Shopify a buy?
More people shopped online during the pandemic, making Shopify an obvious benefactor. Now that the pandemic hype has worn off, the stock has been battered and trades below its pre-pandemic price-to-sales ratio range.
At a sub-normal valuation, investors don't need to worry about overpaying for the stock.
From a business standpoint, annual revenue grew 57% year over year to $4.6 billion in 2021. Gross merchandise volume was $175.4 billion, up 47% year over year. While management did not give clear guidance, it did say revenue growth will be slower than 2021's 57% clip. However, it noted that growth will still be rapid and much faster than e-commerce's growth as an industry.
With ambitious plans for long-term improvements like the Shopify Fulfillment Network buildout or its 6 River Systems robotics company, Shopify isn't planning on staying complacent in the e-commerce space. Having a young 41-year-old Lütke at the helm, Shopify doesn't appear to be in danger of losing its leader, either.
I think Shopify is an excellent buy at this price. Lütke's voting power doesn't bother me, as it isn't too much greater than historical levels. There is still plenty of growth left in the e-commerce space, and Shopify is primed to capture a significant portion of it.